Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr

Question

Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below?

Direct Materials                      8.1

Direct Labour `                       6.0

Variable Mfg. Overhead         6.2

Fixed mfg. overhead               4.8

Fixed administrative costs      0.8

Fixed Selling Costs                 0.4

Does the quantitative analysis suggest that the company should accept the special order?

Explanation / Answer

Since total relevant cost is less than the offer price therefore company should accept the offer.

fixed cost would continue to occur even if offer is not accepted, therefore it has no relevance

Particulrs Amt Direct material           8.10 Direct labor           6.00 variable manufaturing overhead           6.20 Total Relevant Cost         20.30

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